I would love to see the assumptions used to make this appraisal, unfortunately all I can find is standard "estimates and judgments" and the "actual results may differ". (Page 30 10-q)
At current levels there isn't enough profit to justify the current appraised/book value. So what this means to me is that unless construction costs decline significantly (no reason to believe this will happen) the appraiser had to make an assumption that selling prices will rise in the future. How much will they need to rise? I don't know because I don't have a separate valuation for Brightwater but given that Indirect (variable) costs are 3% (page 31 10-q) and gross margins are 12% on average, CALCQ will keep 97% of any price increase on their 27 existing homes and 100%-(12%+3%)= 85% of any price increase on homes they have yet to build. They are very levered from an operations standpoint so it could happen. My problem there is no downside protection in the equity if prices do not rise quickly and I have no evidence that about when/if it will happen. CALCQ is a deep out of the money option on selling prices at Brightwater.
Ironically, the worst that could happen for the equity (and probably the lenders) is for CALCQ to rapidly sell properties at these price levels. They need time to benefit from a robust recovery, but they can’t freeze the process without the development falling into atrophy.
I have no position in CALCQ. I was hoping for an at-the-money/in-the-money option with upside when I began the analysis and got jazzed up based on the appraised value. Unfortunately, unless I have made a gross error (wouldn't be the first time) appraised value is far from runoff value.
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